From ScienceWriters: Congress again lowers self-employment taxes
By Julian Block
Tax legislation enacted last February again reduces Social Security taxes for employees and self-employment taxes for writers, artists, photographers, and other freelancers. The special break trims their taxes by 2 percent for 2012, an exact repeat of what was done for 2011.
What’s the savings this year for NASW members? The amount will vary, depending on how much they receive from salaries or from freelancing. Their savings can be as much as $2,202.
The law requires employees to pay Social Security taxes known officially as FICA (Federal Insurance Contribution Act) taxes on their salaries. It requires employers to match those payroll taxes out of their own funds.
FICA taxes consist of two components with different rates. Normally, employees pay 6.2 percent for the Social Security benefits portion (the old age, survivors, and disability insurance fund), up to a limit of $110,100 for 2012. Consequently, withholding from paychecks for Social Security taxes ends at $110,100.
The 6.2 percent rate drops to 4.2 percent for 2012, just as it did for 2011. The savings on payroll taxes is $600 for employees who earn $30,000, $1,000 when they earn $50,000, and tops out at $2,202 when earnings are above $110,100. The savings is $4,404, double the amount for individuals, for households with two wage earners who both make more than $110,100.
The other FICA rate is 1.45 percent for the Medicare fund (the federal hospital insurance program for the elderly). There’s no ceiling on the amount of wages subject to the 1.45 percent rate, meaning employees with earnings above $110,100 must pay Medicare taxes on every dollar of their salaries and other forms of compensation. They surrender $14.50 to Medicare taxes for each $1,000 of compensation ($1,000 times 1.45 percent). This year, there’s no decrease in the 1.45 percent rate.
Similar rules govern self-employment taxes — Social Security taxes for the self-employed. Individuals liable for self-employment taxes include writers and others who operate their businesses as sole proprietorships, in partnerships with others, or as independent contractors.
The self-employment tax rate normally is 15.3 percent on net earnings (receipts minus expenses). This is twice the 7.65 percent usually paid by employees, because self-employed persons pay both the employer and employee halves. Like FICA taxes, self-employment taxes consist of two components with different rates. The rate is normally 12.4 percent for the Social Security benefits portion, up to a limit of $110,100 for 2012.
The 12.4 percent rate drops to 10.4 percent for 2012, just as it did for 2011. The savings on SE taxes is $600 for writers with net earnings of $30,000, $1,000 when net earnings are $50,000, and tops out at $2,202 when net earnings are above $110,100.
The other self-employment rate is 2.9 percent for the Medicare fund. There’s no ceiling on the amount of net earnings subject to the 2.9 percent rate, meaning self-employed persons with earnings above $110,100 must pay Medicare taxes on all of their earnings. They forfeit $29 to Medicare taxes for each $1,000 of earnings ($1,000 times 2.9 percent). This year, there’s no decrease in the 2.9 percent rate.
What happens after the November elections? Right now, it’s uncertain whether Congress and whoever is in the Oval Office will cut a deal to reduce payroll taxes and self-employment taxes for 2013. What’s certain is that our lawmakers will enact even more complications to an already confusing tax code.
Julian Block is an attorney and author based in Larchmont, N.Y. He has been cited as “a leading tax professional” (New York Times), “an accomplished writer on taxes” (Wall Street Journal) and “an authority on tax planning” (Financial Planning Magazine). For information about his books, visit julianblocktaxexpert.com.